A mortgage is a legal claim on property until the outstanding debt is paid or settled. The person or entity that holds the claim – such as the lender – is called the mortgagee.
What is a mortgage?
A mortgage is a legal right on property that allows the mortgagee to control it or take legal action to settle any debt. The mortgage serves as collateral in cases where a person cannot meet their financial obligations and typically lasts until the debt is repaid.
Note: The terms of the contract and state laws govern what the mortgagee or lender can or cannot do if they wish to reclaim the property or take legal action regarding it.
How does a mortgage work?
Let’s take the case of a mortgage on a car you buy for your business. You purchase the car from a dealer, secured by a bank loan, and then the bank places a mortgage on the car and retains the title. The bank has a security interest in the property, so the ownership of the car remains with them, and if the borrower defaults, they can sell the car to recover the loan amount.
Note: A UCC-1 form is filed to record the mortgage.
There are three possible outcomes for the loan involving a mortgage:
- You make all payments and pay off the debt, which removes the mortgage.
- You stop making payments, and the mortgagee retains the title until the property is sold to someone else and the price is paid.
- You pay off the remaining debt to remove the mortgage and have the ability to sell the property.
Mortgages related to assets must be settled when the person using the asset sells it, and they cannot receive the payment for the sale until that happens. In the car example, the lender will not issue the title until the mortgage is fully paid off. You must use the property while repaying it in most cases.
Types of Mortgages
Conventional mortgages are those that you agree to when purchasing something through financing. Taking a mortgage on a car loan, with the car as collateral, is an example of this. Legal or non-conventional mortgages are obtained through a court order to place a claim on assets for unpaid debts. Legal mortgages include the following:
- Tax mortgages
- Mechanic’s mortgages
- Attorney’s mortgages
- Judgment mortgages
With a tax mortgage, a claim is placed on someone’s property by the federal, state, or local government due to unpaid taxes – granting the government a security interest in the property – and it must be settled before the mortgage can be cleared. The tax mortgage attaches to all of the debtor’s assets, such as property, securities, and vehicles, and includes the right to collect accounts receivable (payments from clients). It also attaches to future assets acquired during the mortgage period. Note: A tax mortgage may restrict your ability to obtain credit and may persist after bankruptcy.
A mechanic or subcontractor often files a mechanic’s mortgage. If a contractor performs work for a homeowner who refuses to pay, the contractor must go to court to obtain a judgment against the homeowner for the money. This judgment can be used to place a mortgage on the house.
An attorney can obtain a mortgage to retain the client’s property until they pay for legal services. This type of mortgage is common in personal injury cases to ensure the attorney is paid from the client’s award. The court gives the judgment mortgage as a result of a lawsuit; if you win the case, the judgment may be the only way to get your money. This type of mortgage is common in small claims cases.
Mortgages in Bankruptcy
Mortgages also play a role in bankruptcy proceedings as they involve secured loans and debt repayment. Mortgages can be discharged in bankruptcy, relieving the debtor of responsibility for the debt. However, some mortgages remain after bankruptcy, as is the case with tax mortgages. The timing of bankruptcy depends on the type of bankruptcy.
How to
Eliminating the Lien
Paying the full amount owed is the best way to eliminate a lien. “Release of Lien” is a written statement that removes property from the threat of a lien. This is usually done in the case of a mechanic’s lien or a tax lien. It must be signed upon payment as proof of payment and to ensure that no judgment is placed against the property.
A lien is a legal process that allows the holder to claim the property until the debt owed is paid. The lien acts as security for the lender and provides them with protection in case the debt is not paid. There are different types of liens including consensual liens and statutory liens. Liens can be discharged in bankruptcy proceedings, and the best way to eliminate a lien is to pay the full amount owed.
Sources:
– IRS. “Understanding a Federal Tax Lien.” Accessed July 12, 2020.
– Legal Information Institute. “Mechanic’s Lien.” Accessed July 12, 2020.
– Legal Information Institute. “Attorney’s Lien.” Accessed July 12, 2020.
– United States Courts. “Discharge in Bankruptcy – Bankruptcy Basics.” Accessed July 12, 2020.
– Legal Information Institute. “Release of Lien or Discharge of Property.” Accessed July 12, 2020.
Source: https://www.thebalancemoney.com/what-is-a-lien-and-how-does-it-work-398313
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